Bank of England aims for greener corporate bond portfolio

The Bank of England set out plans to make its 20 billion pounds ($28.4 billion) of holdings of sterling corporate bonds better aligned with government goals to achieve net zero carbon emissions. However, the central bank will not embark on an immediate sell-off of bonds issued by businesses that have high carbon emissions, such as power utilities and oil companies.

BoE executive director for markets Andrew Hauser said in a speech hosted by Bloomberg that divestment is a powerful tool. It should remain squarely in the toolkit. But it should be used as a credible threat to reinforce incentives, not an indiscriminate quick fix. The central bank said it would set targets for the overall emissions of its corporate bond holdings, invest in green corporate bonds as they became available. This also require bond issuers to publish their emissions.

The bank will seek to rebalance its bond holdings towards issuers with a stronger climate performance. It also will restrict investment in bonds issued by businesses whose activities were widely regarded as inconsistent with lower carbon emissions. The Bank of England’s focus will be on the path of a company’s emissions as well as the outright level.

Hauser said that the precise calibration of this approach will be developed in the coming months. Corporate bonds are not currently bought by the BoE. The next scheduled reinvestment of maturing bonds is due in the final quarter of 2021. The first central bank to take these steps is the BoE. Hauser said that he is hoping that this would set a direction for the wider market. Next month all other banks and insurers will be stress tested by the BoE for their exposure to climate risks.

In this pandemic the BoE has doubled its corporate bond holdings. Non-financial companies have been choosing bonds to date as the representative of sterling issuance. About 10% of all corporate bonds are owned by the Bank of England. The rebalancing would not damage the BoE’s main goals of targeting 2% inflation said Hauser. He added that this ensures financial stability.

Bonds recently classed as eligible for purchase include those of energy giant BP, mining company Rio Tinto and German carmakers Volkswagen and Daimler. The BoE’s policy mandate has been changed by the finance minister Rishi Sunak. Britain’s government has given extra focus to environmental issues this year. This is because it prepares to host the United Nations COP26 climate summit in Glasgow in November.